How to survive a financial crisis and avoid being cheated

It took Naveen Mandhana almost two decades to save Rs 35 lakh. And just one wrong step to lose it all. When his fixed deposits matured in 2007 and his savings bank account swelled, Mandhana got a call from his bank. A relationship manager advised him to put Rs 25 lakh in a real estate fund and Rs 10 lakh in an art fund. “Real estate and art were the flavours of the season in 2007,” says Mandhana.

That was the start of a 10-year nightmare. The real estate fund gave good returns of 12-13% in the first couple of years. Then as the real estate sector slowed down, the returns stopped too. The fund was supposed to mature in 2013, but Mandhana is yet to get back the principal. As for the art fund, he got back only Rs 9.5 lakh on maturity four years ago.

For Mandhana, it has been a costly but important lesson. He now invests in regular mutual funds and does not shirk from taking professional advice. A financial planner would have advised him to stay away from exotic instruments like real estate funds and art funds. “Small investors should focus on basic needs like adequate cover for life and health and use mutual funds, equities and bonds to achieve goals,” says Priyesh Sampat, Head, Strategic Solutions, Simplifying Legacies Empowering Successors, a financial advisory firm.

This week’s cover story looks at people who suffered serious financial setbacks, either due to frauds and mis-selling or poor investment choices. Some of them managed to bounce back due to their grit and determination. Others learnt important lessons and moved on. Over the next few pages, these survivors of financial mishaps relate their stories. We also reached out to experts to know what should have been the right course of action in these situations.

In Pic: Naveen Mandhana, 60, Mumbai, Financial CoachHis crisis: Was talked into investing his life’s savings of Rs 35 lakh into risky art funds and realty funds by his bank’s relationship manager 10 years ago.How he fixed it: Mandhana got back Rs 9.5 lakh from the art fund after six years but is yet to recover Rs 25 lakh from the realty fund. He now invests only in regular mutual funds and does not shirk from taking professional advice.

Some of the tales of survival are indeed inspiring. Meet Deepti Goel, who lost her husband to cancer seven years ago. Goel was targeted by unscrupulous agents who saddled her with multiple Ulips and mutual funds she didn’t need. To make matters worse, the agents churned the portfolio to earn higher commissions. Things became so bad that Goel used to suffer panic attacks every month when SIPs were due. “All I was doing was ensuring that all the SIPs got paid and then I could go back to work and looking after the family,” she says.

In Pic: Deepti Goel, 46, Noida, BusinesswomanHer crisis: Unscrupulous distributors and insurance agents sold her multiple Ulips and 20 mutual fund schemes after her husband’s death. They also churned her portfolio often to earn commission.How she fixed it: With the help of a financial planner, Goel got rid of costly insurance plans and pruned her portfolio to a mix of 5-6 funds. She also realised the folly of mixing investment and insurance.

Luckily for her, she met an upright financial planner who not only helped her junk costly insurance policies but also taught her the basics of financial planning. “The knowledge empowered me and allowed me to identify the mistakes I had made,” she says. Goel is now on her way to become a financial planner and helps other people get a grip on their finances.

Don’t act in haste Not everyone is as lucky. Two years ago, Mumbai residents Girish and Shilpa Peswani were contacted by a broker who showed them a property in a Mumbai suburb. He claimed that the property was available at a good discount because it was being auctioned to repay loans taken by the owner. The Peswanis fell for the ploy and paid a token amount of Rs 1.5 lakh. But when they asked to see the documents, the broker kept fobbing them off with some vague excuses. When he asked for an additional Rs 1 lakh, the Peswanis realised that something was amiss. They found that the broker had sold the same flat to several other buyers in the past and disappeared with the token money. When they tried to cancel the deal, the broker gave them a cheque that bounced. Rattled by the loss, the Peswanis have suspended their search for a property for now.

In Pic: Girish Peswani, 44, Mumbai, IT consultantHis crisis: Got conned by a real estate broker who claimed to be working on behalf of a bank to sell a property that had turned into a bad debt. He paid an advance of Rs 1.5 lakh, which he never got back.How he fixed it: Singed by the episode, Peswani has put his plans of buying property as investment on hold.

Had the Peswanis done their investigation before they handed over the cheque, they would have realised that brokers appointed by banks for selling repossessed property do not have the authority to collect advances. Arun Ramamurthy, Co-Founder, Credit Sudhaar, cautions, “Brokers don’t have any other role to play other than marketing. They can’t charge a rupee from the investor. They are paid a fee by the bank or the Asset Reconstruction Company (ARC) after the deal is closed.”

Further, details of such auctions are published in at least one English newspaper and one vernacular newspaper. Interested investors should look out for such advertisements, which will provide contact details of ARCs or lenders. “When a broker contacts you, double check with the ARC or bank he represents to rule out fraud. Always write out cheque in favour of lending institute or ARC,” says Ajay Oak, Co-founder and Chief Operating Officer, Shubham Housing Finance.

Senior citizens, newbies at risk The low level of financial literacy in India has spawned a huge opportunity for misselling and fraud. Senior citizens, who are not familiar with new investment products, and newbie investors who have no clue about financial markets, are the two most vulnerable segments. Mumbaibased Indula and Dhananjay Panchal were sold life insurance plans and Ulips at the age of 70. At an age when they should have been enjoying their hard earned money, the couple was saddled with 15 insurance policies and an yearly premium of Rs 19 lakh. Says Harshvardhan Roongta, Certified Financial Planner at Roongta Securities, “There is absolutely no need to buy life insurance after retirement. Ask yourself why you need insurance when you are not earning.”

In Pic: Dhananjay Panchal, 75, Mumbai, Retired doctorsTheir crisis: They were sold multiple life insurance policies and market linked products by their insurance agent when they were retiring. At 70, they had 15 life covers, for which they were paying a premium of Rs 19 lakh.How they fixed it: After paying premiums for three years, they realised that the plans were not suitable and terminated them.

Their loss is nothing compared to those suffered by Delhi-based retired couple Kulbhushan and Vinod Suri. The Suris were cheated of Rs 78 lakh by the relationship manager who used their cheques to invest in his own name for several years. The scam came to light when Kulbhushan applied for redemption and was told that the mutual fund receipt he had was fake. After the scam, SEBI changed the rules disallowing the use of third-party cheques for investments in mutual funds.

Newbie investor Jinal Shah lost money when she invested in shares of a little known media company seven years ago. A friend had heard a TV discussion on the stock and recommended it to Shah, who promptly invested Rs 50,000 in the scrip. The investment is now lost because the company went into liquidation two years ago. Shah now does her own research before investing and buys stocks of well established companies. “Every advice to buy stock has to be vetted and researched before investing. Especially in rising markets, there is a temptation to buy on every rumour or advice,” says Dipen Shah, Senior Vice-President and Head PCG Research, Kotak Securities. This temptation should be resisted and one should buy only fundamentally sound stocks with credible management.

In Pic: Jinal Shah, 33, Mumbai, Finance professionalHer crisis: Invested Rs 50,000 in shares of a little known media company on the advice of a friend seven years ago. She lost all her money as the company closed down.How she fixed it: Though she failed to get her money back, Shah made it a point to educate herself about equity analysis.

Don’t be too trusting Can investors do something to protect themselves against such horrible mistakes? For one, do not give away too many details of your finances. In Mandhana’s case, the relationship manager at the bank misused his access to a customer’s account details to mis-sell products.

“Permission from customers should be mandatory before a relationship manager can access savings account details,” says Rohit Shah, CEO of financial advisory firm Getting You Rich. He advocates a separate advisory desk in banks to segregate operations and advisory.

Similarly, Peswani did not bat an eyelid before issuing a cheque for a property even though he had not seen the papers. Goel’s relationship manager asked her for a personal loan. “When I refused saying I don’t have enough to spare, he pointed out that there was enough cash in my bank account,” she says. That’s when she realised that she had given away more information than required.

Experts advise that you should never be too trusting. “As a rule, you should assume that everyone trying to sell a financial service is either hiding something or actively lying. Distrust and suspicion should be the default attitude,” says Dhirendra Kumar, CEO of Value Research. Look out for the obvious red flag in the sales pitch by the distributor.

RED FLAGS TO WATCH OUT These obvious signs should alert investors against frauds:Last chance to invest Steer clear of agents who try to hurry you into making a decision. Wait for at least 10-12 days before you issue a cheque. During that time, research the plan and seek second opinion.Assured returns Only bonds, fixed deposits and some insurance policies can assure the returns they will give. If anybody is giving assurances on returns from market-linked products (Ulips, mutual funds, pension plans) he is lying.Past performance Just because a fund gave dazzling returns in the past two or three years doesn’t mean it will continue to do so in future as well. This is especially true at a time when markets are already at all-time high levels.Prices going up soon It is the favourite ploy of real estate agents. Don’t believe it unless there are plausible reasons, like a new infrastructure project or improvement in the accessibility of a location.Invite more to join Ponzi schemes work on the simple principle. Investors get paid by getting more people to invest. When the scam becomes too big and they have made enough, the promoters vanish.Earn for doing nothing Another common scam promises attractive payments for answering simple surveys. Any scheme that requires minimal work and promises extraordinary returns is obviously a fraud.

Ask questions, seek second opinion Don’t be afraid to bombard financial salespersons with questions. Keep asking till you have understood what the product is all about. Also, don’t sign on the dotted line in the first meeting itself. Take time to understand the plan or investment and seek a second opinion from an independent source.

Knowledge is your best weapon against cheating and fraudsters. Goel was lucky to come across a financial adviser who helped her gain knowledge of financial matters. Today, she is herself a financial adviser.

Quitting should not be the option. After suffering losses in stocks, Shah did not shy from the equity markets. On the contrary, she learnt about equity analysis and is now a finance professional.

Lastly, don’t shy from cutting your losses and starting afresh. After paying the premiums for a few years, the Panchals realised that the insurance policies they were sold benefitted the agent more than they helped them. The high premium (Rs 1.6 lakh per month) was also a cause of constant stress for the retired couple. After paying for three years, they approached a financial adviser who helped them exit the policies. The Panchals were able to identify the problem and fix their financial crisis. We hope you will too.

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